This is referred to as the statute of limitations. Generally speaking, the IRS statute of limitations runs for a period of three years from the date Form 5500 is filed for a given year.
The Internal Revenue Service (IRS) conducts hundreds of audits of 401(k) and other employee qualified retirement benefit plans each year. Audits can result from participant complaints, inter-agency referrals, responses contained in the plan's Form 5500 or from the random selection of the plan for audit.
Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years. The IRS tries to audit tax returns as soon as possible after they are filed.
Generally, a plan must be audited when it has more than 100 eligible participants on the first day of the plan year—or 120 if the plan hasn't been previously audited, and 100 every year after.
Administrative Expenses – The auditor will generally review the Plan document to determine if expenses are allowed to be paid from the 401(k) Plan. Typical Plan expenses may include investment management, custodian, recordkeeping, professional fees, and other transaction or processing fees.
The industry standard for CPAs completing the 401k audit process is 6-8 weeks. This generally includes a short review and information request stage, 2-4 hours of information-gathering interviews, a client review of the preliminary audit report, and the final delivery of the audit report.
100-Participant Threshold
Generally, when a 401(K) plan has 100 or more eligible participants, it's considered a “large plan” for DOL and IRS reporting purposes, which requires an annual audit.
The “80-120 rule,” as it is commonly known, states that your participant count can rise as high as 120 before an audit is required. This rule can help small- and medium-sized organizations avoid the plan audit requirement while focusing on growing the business.
How much will an audit cost? For small to medium size business (plans under $50 million in assets), we see average annual audit costs of $8,000 – $12,000. We have even seen auditors that charge over $18,000 for a plan audit. HealthEquity Retirement benchmarks new auditors each year to find capable, efficient auditors.
Generally, under IRC § 6502, the IRS will have 10 years to collect a liability from the date of assessment. After this 10-year period or statute of limitations has expired, the IRS can no longer try and collect on an IRS balance due.
The six-year rule allows for payment of living expenses that exceed the Collection Financial Standards, and allows for other expenses, such as minimum payments on student loans or credit cards, as long as the tax liability, including penalty and interest, can be full paid in six years.
The rules for how long you must worry--and the stakes--go up materially, including potential criminal charges and prison. Section 6531(2) of the tax code says the statute is six years commencing once the return is filed, or from the time you willfully failed to file a return.
Form 5500 audit requirements depend on whether an EBP is considered a large or small plan. A plan containing less than 100 active participants is responsible for filing a 5500-SF. A large plan contains 100 or more participants, requires the completion of Schedule H and requires an audit.
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
The term “eligible participant” would be anyone who is eligible, and participates in the benefit plan, as well as those who are eligible but choose not to participate. In the terms of 401k rules, you must decide who is an “employee” and who is an “eligible participant”.
The average 401(k) balance is $129,157, according to Vanguard's 2021 analysis of over 5 million plans. But most people don't have that much saved for retirement. The median 401(k) balance is significantly lower at $33,472, more reflective of how most Americans save for retirement.
The majority of businesses match half of the employee's contribution. In other words, for every dollar invested by the employee, the company matches 50 cents. Less than 40 percent of companies match dollar for dollar.
The cost of an independent audit varies depending on the geographic region where the nonprofit is located and how large the organization is. Audit fees can exceed $20,000 for large nonprofits located in major urban areas. It is not unusual for an independent audit to cost $10,000, even for a small nonprofit.
The Employee Retirement Income Security Act of 1974 (ERISA) requires annual audits of plan financial statements by an independent qualified public accountant of plans subject to the provisions of ERISA. This requirement is applicable to plans with 100 or more eligible participants at the beginning of the plan year.
In general, all retirement plans, such as profit-sharing and 401(k) plans, must file a Form 5500 for every year the plan holds assets.
Generally, any plan that consist of more than 100 eligible participants is a “large plan”. Whereas, plans with 100 or less eligible participants are considered to be “small plans”.
To determine if your plan is a small or large plan filer, review your participant count at the beginning of the plan year. If the count is 99 participants or less, you can file as a small plan. If your count is 100 or more participants, you are considered a large plan filer.
The Schedule H is for "large plan" filers (generally plans with 100 or more participants at the beginning of the plan year) and all DFEs. The Schedule I is for "small plan" filers (generally plans with fewer than 100 participants at the beginning of the plan year).
The penalties for filing a late 401k plan audit can be very costly. Depending upon the size and nature of the 401k plan, penalty fees for late Form 5500 filings are around $25 for each day that's passed after your deadline, up to $15,000.